How Will the New Classification of Mutual Funds Affect Me?

You might have received emails from some of the Mutual Fund Houses indicating that they have merged some of their schemes or renamed their schemes. You might have got emails on restructuring of your scheme. These mails might be due to the recent changes mandated by SEBI on classification of Mutual Fund Schemes. Here are some of the key changes that have been mandated -

• A fund house can offer 10 types of equity funds, 16 different bond schemes, and 6 hybrid funds. Apart from these, they can offer schemes based on indices, solutions and fund of funds.
• If the scheme is called a large cap equity fund, it  should have at least 80% of the total assets invested in large-cap stocks
• IF the scheme is a blend of large-cap and mid-cap schemes, the fund will have to allocate at least 35% of its assets to each category.
• If the scheme is a mid-cap equity scheme, it should invest 65% of its assets in mid-cap stocks.
• If the scheme is a small-cap equity scheme, it should invest 65% of its assets in small-cap stocks.
• For debt funds, sixteen new categories are provided. Fund houses will have to align their existing schemes to these categories and launch new ones under these categories. The categories are based on duration, maturity, credit rating and others based on parameters like sector.
• A corporate bond fund can invest only in AA+ and higher-rated instruments. A credit risk fund can invest in AA and lower rated securities.

What is the impact of these changes on the retail investor? What should be his plan of action?

Impact

Performance – In the short run, there could be changes in the scheme's portfolio which could affect the performance. Some might outperform and some may under perform. Many fund managers tweak the portfolio to get higher returns. This may not be easily possible now.

Comparison of Schemes is easier – The retail investor can now compare schemes with more accuracy. Earlier the fund name could be misleading or unclear. Now the retail investor can clearly compare schemes in a category as they will have similar characteristics. He need not check how much has a large cap fund invested in mid-caps. He knows what he is investing in.

Clarity on what the MF scheme is invested in – The retail investor will have more clarity on how his funds are invested as the categorisation is more accurate. The fund manager has less leeway to drift to investments different from the MF scheme intent or objectives. This means the investor need not worry if the portfolio of the scheme has changed and if it still matches his investment objectives

Plan of Action

As a retail investor, check what changes are incorporated in the schemes you are invested in.

• As of now, there have not been too many drastic changes. Some funds have changed their scheme definitions. Some have renamed the schemes. Others have changed the investment structure or brought changes to the portfolio. Review your portfolio in case you have funds whose structure and portfolio have changed significantly. Review the fund's objectives and evaluate the role of that investment in your portfolio. If it does not match with your objectives in the long run, bring a change to your portfolio.
• In case of debt funds, there are many categories now. You can easily check if it makes sense to have a particular scheme in your portfolio.
• When you are evaluating the performance of a scheme, check if it makes sense to compare with past returns. The past returns might not be valid if the portfolio has changed significantly.
• Do not rush to make changes. Check how your investment portfolio is performing. Check the expenses you will incur in case you exit out of certain schemes and enter other schemes.
• The new classifications will be useful to investors as they will have more knowledge on their investments and there will be uniformity across categories.